Hawkish Fed Signals Accelerated Timetable for Tightening

In its updated summary of economic projections released this afternoon, the Federal Reserve accelerated the timetable for normalizing monetary policy, signaling both a more rapid tapering of its bond purchase program as well as a more aggressive path for raising rates over the next three years.

The more hawkish tone of the announcement is a response to this month’s shocking inflation reports which showed prices rising at the fastest pace in 40 years. Consumer prices rose at a 6.8% annual rate in November, and producer prices, which economists view an indicator of pipeline inflationary pressures, rose at an even-more rapid 9.6% annual pace.

In recent comments, Fed and Treasury officials have acknowledged that these price pressures may be sustained, abandoning their earlier position that higher inflation was a “transitory” phenomenon.

The median forecast of Federal Reserve officials now project eight 25 bp rate hikes between now 2024 (i.e., 3 in 2022, 3 in 2023, and 2 in 2024). This represents a major shift from the last Fed meeting when officials did not foresee any rate hikes in 2022. The Fed forecast suggests a faster pace of tightening than implied by the forward curve.

Despite the steepening of the short-end of the yield, reflecting expectations of a more active Fed in the near term, the longer-end of the yield curve remains relatively flat. Ten-year yields remain historically low and well below March’s highs. This makes it possible for borrowers to extend the term of their fixed rate protection with only a modest pickup in interest expense.

November retail sales miss expectations as prices continue to rise. Month-over-month retail sales increased 0.3% in November, well below analyst expectations of an 0.8% increase. The weak print comes after a strong October, as analysts believe consumers pulled forward holiday shopping due to supply chain concerns. However, the report suggests that consumers may be tempering their spending amid a resurgence in COVID cases throughout the country.